Swaps-Group_1,_Section_A

Swaps-Group_1,_Section_A - annum on a notional principal of...

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Click to edit Master subtitle style 5/30/11 Swaps Presented By: Group 1, Section
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5/30/11 22 DERIVATI VES Financi al Commoditi es Basic Complex Forwards Swaps Futures Exotics/ Structured Products Options Warrants & Convertibles
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5/30/11 Investment in Derivatives Swaps : Swaps are financial contracts that obligate each of the two counterparties to exchange (swap) a series of cash flows in future. Swaps are customized contracts that are traded in the over-the-counter (OTC) market between private parties Two basic kinds of swaps are available : Interest rate swaps : Exchange of one set of interest payment, (eg: Fixed) for another set of interest payment (eg: Floating) based on some prefixed benchmark (LIBOR or MIBOR) all 33
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5/30/11 Company A and Company B enter into a five-year swap with the following terms: Company A pays Company B an amount equal to 6% per
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Unformatted text preview: annum on a notional principal of $20 million. • Company B pays Company A an amount equal to LIBOR + 1% per annum on a notional principal of $20 million. • Therefore, Company A will pay Company B $20,000,000 * 6% = $1,200,000. Suppose the LIBOR rate is 5.33%; then, Company B will pay Company A $20,000,000 * (5.33% + 1%) = $1,266,000. 44 Interest Rate Swaps 5/30/11 Currency Swaps For example, Company C, a U.S. firm, and Company D, a European firm, enter into a five-year currency swap for $50 million. Let's assume the exchange rate at the time is $1.25 per euro .First, the firms will exchange principals. So, Company C pays $50 million, and Company D pays 40 million. This satisfies each company's need for funds denominated in another currency (which is the reason for the swap). 5/30/11 T H A N K Y O U...
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This note was uploaded on 05/30/2011 for the course ECON 101 taught by Professor Ke during the Spring '11 term at Lethbridge College.

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Swaps-Group_1,_Section_A - annum on a notional principal of...

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